A broker told a buyer that he held exclusive rights to sell a property. In reality, he did not. Relying on that representation, the buyer signed a brokerage agreement, believing she could not purchase the property without going through him. When she later discovered there was no exclusivity, she canceled the agreement and refused to pay the full commission. The Court ruled that because the broker’s misleading representation induced the agreement, he was not entitled to the full brokerage fee, but only to restitution — reasonable compensation for the limited services that actually benefited the buyer.
The broker (“the plaintiff”), according to the purchasing client (“the defendant”), represented to her that he had received exclusivity for the sale of the property. However, it later became clear that the exclusivity had ended in mid-2018, while the defendant signed the brokerage service agreement in July 2021 (approximately three years later).
The defendant was referred to the plaintiff by another broker she knew (“the second broker”), who informed her that the plaintiff held exclusivity for the sale of the property. The defendant claimed she engaged the plaintiff solely because she believed that if he had exclusivity, she would not be able to purchase the property except through him. Therefore, she was misled. The defendant refused to pay brokerage fees, and the plaintiff filed a lawsuit against her.
What did the Court rule?
The Court relied, among other things, on the testimony of the second broker (which the Court described as objective), who had referred the defendant to the plaintiff and told her he held exclusivity. By doing so, the Court ruled, the plaintiff breached both the Contracts Law (General Part) and his duty toward the client under Section 18 of the Real Estate Brokers Law, which provides that a broker must act toward his client with loyalty, fairness, and in an accepted manner, while disclosing all material information in his possession concerning the property.
Based on this misleading representation, the defendant entered into an agreement with the plaintiff rather than approaching the seller directly. The Court regarded a letter sent on behalf of the defendant to the plaintiff—stating that she only discovered at the time of signing the purchase agreement that the plaintiff did not have exclusivity—as a cancellation of the brokerage agreement within a reasonable time. However, upon cancellation, restitution is required by law. Upon cancellation of the agreement, the broker is entitled only to restitution — compensation for the benefit the client actually received from his services.
The defendant offered to pay the plaintiff half a percent plus VAT on the transaction value, but the plaintiff declined. The Court found the defendant’s offer reasonable and an accurate assessment of the value of the benefit she received, which should be returned to the plaintiff. The broker is not entitled to profits, but only to restitution, namely reimbursement for the work from which the defendant benefited (showing the house, telephone conversations, and two meetings he attended).
The plaintiff did not propose an alternative method of calculation, as he rejected the defendant’s settlement offer and caused her to incur expenses in defending the lawsuit. The Court assessed the restitution amount at approximately NIS 10,000 plus VAT; however, from this amount, the defendant’s expenses of NIS 1,000 and her legal fees of NIS 10,000 plus VAT were deducted. Accordingly, it was ultimately determined that the plaintiff would pay the defendant NIS 1,000 plus VAT.
Conclusions
Real estate brokerage law, as is well known, falls under the broader umbrella of contract law. Since it was established that the defendant was misled and entered into the brokerage agreement solely for that reason, she was entitled to cancel it. The broker is entitled to restitution—that is, reasonable compensation for the services provided—but not to the full brokerage commission. The defendant is entitled to reimbursement of expenses incurred in defending the lawsuit she was forced to defend.
This case clearly illustrates that the Real Estate Brokers Law, on its own, does not fully address situations in which a brokerage agreement is canceled because a broker’s misrepresentation induced the client to enter into the contract. In such circumstances, it is the Court that must determine how to assess the value of the broker’s work when he is not entitled to receive the full brokerage commission.
A broker must be extremely careful not to make false representations or provide misleading information, as these may result in the loss of the full brokerage commission, or at least the majority of it.
In our opinion, the approach adopted by the Court may also apply in the opposite scenario, where a property owner grants a broker exclusivity and, several months later—before the exclusivity period ends—changes his mind and cancels the exclusivity agreement. In such a case, the broker may argue that he is entitled at least to restitution, namely compensation for the actions actually performed, and he may wish to specify this in the exclusive brokerage services agreement.
Adv. Dr. Arik Ariel is a leading real estate attorney in Israel, specializing in brokerage law, with over 30 years of experience in the field. He regularly lectures on behalf of the Ministry of Justice, the Registrar of Realtors, the National Chamber of Realtors, and major real estate chains. Adv. Dr. Ariel was appointed by the Ministry of Justice to lead the drafting of new ethical regulations for real estate brokers. His book, Real Estate Brokerage Law, offers an in-depth exploration of ethical standards in Israel and abroad, providing valuable insight into the evolving landscape of the profession. He can be reached at [email protected].
